When buying goods or services on behalf of your clients, you need to be careful about how you account for them: disbursements and VAT can be a bit of a minefield sometimes… Read on to find out more.
Disbursements are not counted in any VAT calculations for your turnover, so you need to make sure you understand how they work!
Let’s look at the case of Mr. Smith. He is a website designer and thought he was being diligent in working out his turnover so as not to exceed the VAT registration threshold.
However, he made the following mistake: he believed that if he bought domain names for his clients and then included them with with his final bill without marking them up, it would qualify as a disbursement.
Unfortunately, HMRC’s view was that, as he hadn’t itemised the items on his invoice, the whole amount on the invoice should be counted in his VATable turnover – and that there were penalties applicable!
What you should do
There’s one simple question to ask, first and foremost: are you acting as an agent or as a principal?
Your item qualifies as a disbursement if you’re acting as an agent and you fulfil the 8 conditions set out here by HMRC.
This rule only applies if:
- You act as an agent
- The use of that item it does not benefit you
- You don’t make a profit from the item in question
You should also have a paper trail of your client agreeing to the fact that you will be buying items on their behalf. And, as we saw from the example above – always itemise any items for disbursement on any invoice so it’s totally clear for everyone to see.
Disbursements and VAT – key takeaways:
- You must be acting as the agent
- You must itemise the invoice and make it clear what the disbursements are
- You mustn’t mark the items up if you want them to qualify as a disbursement
- You should not be benefiting from the use of the item under question
As always, if you have any questions whatsoever, just drop us a line – we’re a friendly bunch of accountants in East London here!